Too Rich To Be Generous?

At some colleges, concerns about reputation and exclusivity seem to outweigh the impact of tuition on students and families.

In the last few months, a number of the wealthiest colleges and universities in the country have been reconsidering the level of their financial aid. Paradoxically, their intent is not to increase their financial aid, but to reduce it. How do we reconcile societal concerns regarding the rising costs of higher education (and the corresponding rise in student debt) with the decision by wealthy colleges to spend less on student aid? What is going on?

Let’s turn the clock back about 30 years. In the early 1980s, there were, by today’s standards, only a handful of wealthy colleges and universities. Top-tier universities such as Duke and Brown had endowments of less than $150 million. Even at Harvard, endowment drawdown and annual giving contributed only a minor portion of the annual operating budget. And yet, as a fraction of median family income, the cost of college then was significantly more affordable than it is today.

Fast forward to the present. More than 75 colleges and universities have endowments of more than a billion dollars, and multibillion-dollar capital campaigns have become routine among the wealthiest universities. A handful of colleges and universities have more than $1 million in endowment per student! A drawdown rate of 5 percent would yield $50,000 per student per year—seemingly enough to cover the full costs of educating them. But despite this enormous growth in wealth, every year we continue to see prices rising at these institutions. Not one has ever reduced its sticker price, even when – at Harvard, for example – endowment earnings grew by more than $5 billion IN A SINGLE YEAR!

It is true that, a few years ago, there was a kind of group epiphany among the wealthiest universities that led to a declaration that families with an income lower than X (the specific income number differed among the various institutions) would no longer have to take out loans, but instead would be given additional institutional aid. (It was probably a coincidence that this “epiphany” coincided with vocal concerns from Sen. Charles Grassley [R., Iowa] about the very low endowment drawdown rate at many of the wealthy schools – much lower, for example, than is mandated for foundations.)

However, it is also true that roughly half of the students at Ivy League schools are sufficiently wealthy that they do not qualify for institutional aid (the percentage of students not receiving institutional aid ranges from 40 percent at Harvard to 56 percent at Brown), meaning that they are paying well in excess of $50,000 each year – a figure that would be impossible for the average American family.

But now many of these wealthy institutions are saying they can no longer afford to be so generous. In the fiscal year ending June 30, 2012, endowment growth from investments was basically flat, an outcome that struck fear into the hearts of these wealthy schools. One can imagine the conversation: “The economy has changed. We can no longer count on investment returns that average more than 8 percent annually. We must cut back. But where shall we cut? I know – let’s reduce the amount we spend on student aid!” (All this ignores the fact that the average investment return the year previous – 2011 – was almost 20 percent!)

I expect at this point that the American public must be mightily confused by the widely divergent responses of institutions of higher education to the explicit concerns of parents, newspaper editors and politicians regarding the declining affordability of a college education. One group of institutions – and I’m proud that Roger Williams University is a leader in this small but growing vanguard – is very much focused on increasing affordability by, for example, freezing tuition levels while simultaneously attempting to increase the quality of the educational experience at their institutions.

Institutions in the second group seem much more concerned about their reputation and their exclusivity, and are taking steps that will significantly increase costs to students and their families, thereby reducing affordability.

How is it possible for institutions to respond to the same issue in such divergent ways? I think the answer stems from a fundamentally different view of the mission and purpose of higher education – a topic I will address in my next blog post.

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